The euro crisis forced its way back into the headlines this week. Spain announced that its deficit for 2011 would be at least 2% higher than the targeted 6% of GDP as its economy weakened further. Unemployment rose to almost 21.5% of the workforce. Greece, still trying to finalise the details of its second rescue package announced last October, warned that unless the package is agreed by March, it will run out of cash and be forced to default and exit the eurozone. A rise in emergency short-term borrowing by banks from the European Central Bank pointed to an enduring credit crunch in the banking system.
What the commentators said
“The challenges [for the eurozone] remain enormous”, said Simon Nixon in The Wall Street Journal. Governments have huge refinancing needs this year. Italy and Spain will both have to raise debt worth more than 20% of their GDP. With the eurozone slipping into recession, investors are hardly likely to be convinced that they will be able to grow their way out of trouble. Greece, where the main sticking point appears to be the size of the voluntary write-down bondholders will have to make, is also “a running sore”, said Nixon. If it fails to qualify for more aid, “a messy default” and a continent-wide financial crisis could result.
If yields on Italian and Spanish debt spiral as investors flee, threatening a default, the eurozone’s rescue fund “is in no shape to act decisively”, said Stephen Fidler, also in the Journal. The fiscal squeeze across the periphery presents a further danger. “It is not clear how long voters will submit to a diet of austerity,” said Buttonwood in The Economist. Popular defiance could well prompt a government to pull the plug – also a route to an uncontrolled default.
In the meantime, thanks to German opposition, there is still no sign of eurobonds or large-scale money printing by the European Central Bank, two measures that would end fears of a default. All this means that “lurching from one crisis-driven summit to the next”, as Jeremy Warner put it in The Daily Telegraph, is likely to be the best-case scenario this year. On that happy note, said Lex in the FT, get set for yet another summit later this month.